For someone who started his economics education over 50 years ago, I learned to see the steadfastness of the United States in its support for trade liberalization as a fact of nature. From that viewpoint, a big surprise in the economic policy framework of the United States government during the last few years is the increased emphasis it is now putting on the bilateral balance of payments on goods account between the U.S. and each of its trade partners as the main criterion by which to judge whether a country’s trade policy is fair and appropriate. It sometimes appears that the criterion also includes the account on invisible trade – such as services and intellectual property – but that is not yet entirely clear.
Judging the appropriateness of a country’s exchange rate on the basis of the bilateral balance of payments is only part of a much bigger surprise in the behavior of the United States with respect to the international economy: It’s clear that U.S. President Donald Trump has decided to forgo the United States’ role as hegemon of the global economy – that is, the country that takes responsibility for the efficient operation of the international economy - even if at times doing so appears not to be in its short-run interest.
Within the framework of the global economic relations that have gradually been put in place in the 70-plus years since the Bretton Woods conference and the end of World War II, the United States repeatedly took it upon itself to take the lead in solving multilateral problems that arose in the international economy. That was clear in the setting up of the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade and its eventual successor, the World Trade Organization. It was clear in the creation of the Marshall Plan. It was clear in discussions on actual and potential problems like the Latin American debt crisis, and the Asian crisis, and the absorption of the former Soviet-bloc countries in the global economy. And it was clear too in the admission of China into the World Trade Organization.
The global economy set up during the period since the end of World War II worked well – never perfectly – but always with an understanding that whatever problems needed to be solved would be worked on, with the goal of finding a solution. There is little doubt that the growth rate of global GDP post-World War II world was extremely high by historical standards, probably the highest ever for a period as long as 70 years. And there is little doubt that the most rapid rates of growth were recorded in Asia, and since the beginning of China’s economic reforms, especially in China.
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Now the United States has declared that it will make its decisions in all aspects of economic policy on the basis of what is good for the United States. We have not yet seen how the international economy will behave if this change in the principles that guide acceptable behavior takes hold. But analytic reasoning about the impact of this distortion on growth, and the historical record, including recent developments in international trade policies, support the view that global economic performance would deteriorate if those principles were no longer to rule in the world economy.
The world economy is rapidly deteriorating into an arena in which some countries compete to ignore the rules of the global system with the goal of maximizing their economic performance at the expense of other countries. That charge is made about China by the United States and other countries. Most of the world’s developed countries complain about the devices used by China to ensure that it gains access to the technologies invented and used by leading companies seeking to trade with China. And they complain too about the use of cyber attacks by Chinese official agencies to wrest aspects of technology and business management from foreign companies. And China in turn complains about restrictive trade measures imposed by the United States on Chinese investments and on Chinese exports.
The result is that we now have a tariff war taking place between the United States and China – and also the United States and European countries, and the United States and parts of the rest of the world. The politics of tariffs are not conducive to operating an efficient global economy. The tariff war going on began with tariffs being imposed, and we are seeing how governments are quickly putting in place subsidies to mitigate the effects of the tariffs on domestic producers and consumers. All this complicates global trade, with the result over time being a proliferation of constraints on market-based trade, like what could be seen in many developing and emerging market countries at times in the 20th century. And once we have seen those results and absorbed their lessons, we will have to work hard to return to liberalizing trade and reducing tariffs.
The economic reason not to go down the tariff road is that we can all do better by reducing tariffs. We have to hope that the United States and China can reach agreements that will get rid of the recent increases in tariffs at least as rapidly as they appeared.
Central bank heads can’t be fired so quickly
The law does not permit the U.S. president to fire the Federal Reserve chairman due to his professional decisions. There are subjects which central bank chiefs should discuss with the government before undertaking serious changes in policy. And they should try to work closely with the government, while retaining their independence for use when their professional judgement requires them to take actions that might not be in full agreement with the views of the public or the government.
It is customary that a central bank chief meet regularly with the finance minister. But the current situation, in which more governments than in the past are trying to bring their central bankers to heel, is indeed worrisome. Central bankers have to be careful. When I was governor of the Bank of Israel, friends would sometimes tell me that we were after all an independent central bank. I often thought, and sometimes said, that we are always two or at most three bad decisions away from losing our independence.
Governments should be reluctant to fire their central bankers. They should also realize that criticizing central bankers can be counterproductive. Central banks cannot leave the impression that their decisions were influenced by political considerations.
A central bank has to avoid creating the impression that it is changing its policy in the face of political pressure, and in some cases this restriction may force it to keep interest rates higher than necessary, and higher than it would have had it not been facing political pressure. Furthermore, a government that regularly intervenes in interest rates damages the economy in the short term and the long term.
Nonetheless, central bankers should realize that they need to behave in a way that makes it difficult for the government to fire them. They need to realize that if the government keeps pushing them to undertake bad policies, they should go public, take into account that they may have to resign to defend the independence of monetary policy from unwise political pressures. In that way they would be investing in improving future monetary policy and the economy.
I very much hope and expect that the Fed will continue to make its monetary policy decisions on the basis of its professional judgment of what is good for the economy. Further, I strongly believe that is what will happen, for the Federal Reserve Board that the Trump administration has put in place is a highly professional group of mature and well-qualified experts.
Prof. Stanley Fischer served as Bank of Israel governor and as Federal Reserve vice chairman.